Global insurers and reinsurers voiced a host of concerns with the proposed methodology the International Association of Insurance Supervisors (IAIS) developed for determining globally systemic important insurers (G-SII). With many agreeing with the organization’s stated tenets that traditional insurance is not systemically risky, then finding fault with the disconnect between the statements and the way in which the methodology is formatted. This may lead to the classification of traditional/core insurance as systemically risky, and the imposition of stricter than necessary regulatory treatment.
Insurers want a very high bar set for the G-SII designations, if they even agree with a blanket designation of a whole enterprise at all.
The G-SII designation is a product of the IAIS, which was charged by the G-20 established Financial Stability Board (FSB) to develop an international architecture for insurance supervision so another worldwide financial crisis does not occur. Comments culled through several months were finally posted late Wednesday in a table format.
Insurers were concerned that some aspects that are fundamental to many insurers and standard insurance business, such as the use of derivatives like credit default swaps (CDS) for hedging purposes, the purchase of local government debt, financial guaranty insurance and even the sale of variable annuities could propel a company into a G-SII designation.
Interconnectedness of an institution to the global financial system is one of five assessment categories the IAIS uses to determine G-SIIs. Its weighting is 30% to 40% as a category in determining G-SIFIs. But insurers are concerned that measuring interconnectedness involves chiefly traditional insurance activities and not significant systemically risky activities.
The American Council of Life Insurers (ACLI) and others pointed out that even if insurers do large amounts of derivatives trading the level of derivatives activity (and counterparty exposures) at even the largest insurers is dwarfed by that of the largest banking groups.
The ACLI told the group of insurance supervisors managing the project under the banker-heavy FSB, that “the relative global systemic significance of an insurer must be measured against that of all global systemically important institutions, and not against other insurers. Such a comparison should be based on similar non-insurance activities undertaken by each institution.”
“Since it is well established that the high degree of interconnectedness and the holding of overwhelming short-term liabilities that are fundamental to the banking industry’s business model are also the characteristics that lead to systemic significance, we believe comparing insurers against all financial institutions and their relevant market data will demonstrate the significantly less systemic importance of any potential G-SII. The life insurance industry shares neither of these characteristics, and any such assessment should reflect as much. It would be improper to ignore this fact and to move forward with a G-SII designation simply for the expedience of ‘including an insurer in the mix.’,” the ACLI stated.
MetLife said that, while size should be one of the factors (among others) to consider whether unmitigated systemically risky activities conducted by an insurer expose it to failure of systemic proportions, the size of a company and its global reach should be eliminated as criteria from the assessment as they are not a measure of systemic risk. To the contrary, they can reduce a company’s risk profile through diversification which the IAIS recognizes several times in its commentary.”
Companies like ACE Group and others protested the weighting in the assessment categories given to a company’s sheer size and global activity, arguing that such factors already form a threshold of the initial 48 companies surveyed, and that size and reach help spread the risk, not increase it.
Companies also said they don’t like the stigma attached to even being asked to supply data.
“We understand that the IAIS is focused on the impact a failure would have on the global economy and that the impact is obviously correlated to the size and global reach of the insurer, however size and global activity are already being considered as thresholds to develop the initial population of companies to consider. Providing for additional weighting based on size and global activity seems to be double counting these factors and ignores the noted stability that companies gain by size and geographic spread,” ACE stated in its comments.
The American Insurance Association (AIA) suggested that the IAIS follow the U.S. approach for Systemically Important Financial Institutions (SIFIs) under Dodd-Frank Act implementation and pre-screen candidates, “using a tiered process that starts with universally-applicable quantitative measures that align with designated ‘systemic risk’ categories ‘of size, interconnectedness, leverage, and liquidity risk and maturity mismatch,’ appropriately tailored to the broad assessment categories.”
Such an approach would include both quantitative benchmarks for comparison, as well as a method of initial screening based on activities to reflect the inclusion of the G-SII assessment category keyed to non-traditional, non-insurance activities,” the AIA stated.